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Issues involved: Disallowance of expenses u/s 40A(2)(b), suppression of sales, adhoc disallowance of expenses.
Disallowance of expenses u/s 40A(2)(b): The assessee appealed against the disallowance of expenses totaling Rs. 95,754, comprising conveyance, miscellaneous expenses, and salary payments. The AO was not satisfied with the credibility of the vouchers provided by the assessee, leading to the disallowance. The CIT(A) confirmed this disallowance. However, the ITAT directed that a portion of the conveyance expenses be allowed based on estimated reasonable deduction, citing a judgment of the Kerala High Court. The disallowance of miscellaneous expenses was also upheld as reasonable based on the business activities and turnover. Regarding the disallowance of salary payments, a portion paid to a relative was disallowed u/s 40A(2)(b) as excessive, while the balance amount paid to other employees was allowed as a deduction. Suppression of sales: The CIT(A) upheld the additions of Rs. 2,98,629 and Rs. 62,536 as suppression of sales and gross profit margin. The ITAT found that the shortage of stock revealed during a survey indicated sales made outside the books. It was determined that only the gross profit margin on such sales should be treated as income. The AO was directed to apply the gross profit margin declared by the assessee on the sales amount, resulting in a partial sustenance of the additions. Adhoc disallowance of expenses: Ground No. 4, related to adhoc disallowance of expenses, was not pressed by the assessee and was dismissed accordingly. In conclusion, the ITAT partially allowed the assessee's appeal, granting relief in terms of the disallowance of conveyance and salary expenses, while upholding the disallowance of miscellaneous expenses and a portion of the salary payment to a relative. The additions related to suppression of sales were partially sustained based on the gross profit margin calculation.
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